What’s Shell’s Valuation after 4Q17 Earnings?



Shell’s valuation shows mixed trend

In the preceding part, we looked at Royal Dutch Shell’s (RDS.A) stock price forecast range based on its implied volatility. In this part, we’ll consider Shell’s forward valuations after 4Q17 earnings. Let’s begin with the forward PE (price-to-earnings) ratio.

Shell is trading at a forward PE of 13.7x, which is below its peer average of 15.5x. Peers like Total (TOT), YPF (YPF), and Petrobras (PBR) are also trading below the peer average. TOT, YPF, and PBR currently trade at a forward PE of 12.5x, 13.0x, and 11.9x, respectively.

Shell (RDS.A) is currently trading at a forward EV-to-EBITDA of 5.7x, above the peer average of 5.5x. Peers ExxonMobil (XOM), Chevron (CVX), and Suncor Energy (SU) also trade above the peer average at 7.9x, 6.7x, and 7.2x, respectively.

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Shell’s valuations

Shell’s forward PE stands below the peer average, but the company’s forward average EV-to-EBITDA stands above average. Lower oil prices had impacted Shell’s performance earlier. Plus, the acquisition of BG Group had raised Shell’s leverage level. But now the situation seems to be changing. Shell is witnessing an improvement in its financial and debt position quarter-over-quarter. The latest 4Q17 results also indicate the same.

In the fourth quarter, Shell reduced its net debt by around $8 billion over 4Q16 to $65 billion. Jessica Ulh, Shell’s chief financial officer, in its 4Q17 results webcast transcript stated, “We have clear visibility on bringing gearing to 20% and generating the cash flow to support an AA credit rating. Over time, I expect gearing to move below 20% to ensure robustness of our financial framework. This will build further resilience to the changing macro environment and provide balance sheet strength to prepare us for the future.”

Thus, debt reduction and better financials could be the reason why Shell’s forward EV-to-EBITDA could trade above its peer average. Also, if the financial improvement continues, Shell’s forward PE could cross over its peer average.


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